VMware shares hitting pricey levels

By DAN GALLAGHER, MARKETWATCH
August 26, 2007 08:36

VMware scored the best-performing IPO of the year last week when its share price jumped more than 75% on its first day of trading.

2 minute read.



MarketWatch: In-depth global business coverage After only a week on the public market, VMware Inc. has already seen its share price soar more than 150% - giving the young software maker a higher market cap than many of its more-seasoned peers. This surge has also drawn the concern of some analysts, who admit they love VMware's business but are hard pressed to justify its current valuation, which is now one of the highest in the software sector. Walter Pritchard of Cowen & Co. wrote in a report last Monday that "there are very few sets of assumptions that allow the stock to meaningfully outperform the current valuation." Shares of VMware were trading in the $55-$57 range that day - nearly double the stock's IPO price on August 14. Since then, the shares have gained even more ground. By late Thursday, VMware was trading just under the $70. At that price, VMware is trading at more than 90 times estimated earnings for the next four quarters. That's one of the highest valuations in the entire software category, which carries an average price-to-earnings ratio of 31.4, according to data from Thomson Financial. VMware is also trading at a sharp premium to software giant Microsoft - which it designates in its IPO filing as its most notable competitor. Microsoft trades at only 16 to 17 times estimated earnings for the next year. VMware scored the best-performing IPO of the year last week when its share price jumped more than 75% on its first day of trading. The company makes "virtualization" software designed to help corporate networks run more efficiently. It is majority owned by EMC Corp. and has minority investments from Intel Corp. and Cisco Systems Inc. Pritchard, who started coverage of the stock when it debuted, added a "neutral" rating to the shares Monday. He said he was "incredibly bullish" on the company's business prospects but could not recommend purchase of the shares at a "valuation that appears stretched." A similar view was sounded by Daniel Renouard of Baird, who started coverage of the stock with a "neutral" rating on Tuesday. "We believe current levels...as fair given enormous growth prospects, heavy operating expense investment, and partially handicapped by long-term competitive uncertainty," wrote Renouard, who set a $60 price target on the shares. "Fundamentals are likely to be strong for the foreseeable future and we would look for meaningful upside to existing expectations or a pullback in the stock to get more aggressive." Katherine Egbert of Jefferies & Co. took a more bullish stance, boosting her price target on the shares to $74 from $42 on Wednesday while maintaining her "buy" rating. In a report to clients, she said VMware "has the brightest prospects of any software company in the last 10 years." She also noted that her latest price target implies a similar valuation to Opsware and XenSource, which were recently acquired by Hewlett-Packard and Citrix. MarketWatch: In-depth global business coverage


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